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Russia's MTS to 'Sacrifice' Connectivity in Software Rebirth

Iain Morris

Strikingly festive in the Easter season, the egg-shaped logo of MTS can also be seen as a neat symbol of the operator's planned rebirth.

Mobile TeleSystems OJSC (MTS) (NYSE: MBT) remains Russia's biggest operator, generating nearly all of its revenues from connectivity services at home and in neighboring countries. But it seems ever more disenchanted with its connectivity role. A future beckons, insist executives, in which MTS is recognized first and foremost as a software company, systems integrator, application developer -- but not a telco. "Basic connectivity is something that will eventually need to be sacrificed," says Vasyl Latsanych, the company's chief marketing officer.

Hatching a Plan
One of the several thousand retail outlets that Russia's MTS maintains in its domestic market.
One of the several thousand retail outlets that Russia's MTS maintains in its domestic market.

In Latsanych's view, the data connectivity business will ultimately follow the voice one into obscurity. Customers will not pay for a connectivity service but for a "solution" that includes connectivity as an important but invisible ingredient. And just as data revenues are replacing those from voice, so revenues from these solutions will one day supplant sales of data connectivity. Using an egg metaphor in an entirely different way, Latsanych likens the transformation to the kind that occurs in a restaurant's kitchen. "The egg is the connectivity, but suddenly you've got an omelet worth $10 out of an egg worth cents," he says.

MTS is hardly unique among telcos in trying to carve out a new identity amid concern about the prospects for the mainstream network business. Even in emerging markets, soaring adoption of smartphones has left operators with little familiar territory into which they can expand. Competition from rivals old and new is squeezing sales. Economies are foundering in some countries. And regulation is an ever-present headache.

In the case of MTS, growing pressure is evident in recent financial results. Thanks to rising usage of voice and data services, overall company revenues were up 2.1% last year, to 435.7 billion Russian rubles ($7.73 billion). Yet they shrank 0.5% in the final quarter of the year, and operating income (before depreciation and amortization) in 2016 fell by 4.4%, to RUB169.3 billion ($3 billion). So uncertain is the economic outlook that MTS cannot say whether sales and profits will rise or fall this year.

Source: MTS.
Source: MTS.

But few telcos, and arguably no other emerging-markets players, are more serious than MTS about digital and business transformation. During an investor presentation at London's Science Museum last month, the subject generated more debate among analysts and MTS executives than headline results. "We need to become a software company whose network is just a part of the entire business," said Andrei Dubovskov, the CEO of MTS. "This is the way we will harvest revenues and profitability."

Next page: Eggs into omelets

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